The Truth About Holiday Loans

Over the past few weeks, I’ve seen an abundance of offers for “holiday loans,” more than I recall seeing in previous years. Many credit unions and banks in my area are advertising these loans, pretty clearly targeting people who dream of a big holiday celebration that is beyond their current financial grasp.

Let’s dig into the ins and outs of these financial tools.

A “holiday loan” is a type of personal loan promoted during the holiday season.

A “holiday loan” simply means that a bank or other lending institution is giving you a personal loan. Its lending money without collateral, which means that there’s nothing it can repossess if you can’t pay it back, but with that comes a requirement for a credit check that shows that you have at least decent credit.

To get a “holiday loan,” you simply apply at a bank or credit union, either online or offline. It’ll check your credit history and if you have good credit, it’ll offer to lend you money now with a payment plan to be carried out in the coming year.

For example, you might be able to borrow $500 and have it in hand right now, but it may come with a payment plan that requires you to pay $75 a month for the following eight months. That adds up to $600 out of your pocket in the long run, of course, but it puts $500 in your hands right now.

There’s nothing really special about a “holiday loan” other than the time of the year that it’s marketed. It’s basically the same as a normal personal loan that you can get at a bank or credit union or other lending institution if you have good credit.

So why the special marketing?

People often take out “holiday loans” to get through expensive holiday seasons.

The reality is that the holiday season hits a lot of people right in the wallet, and quite hard. People love to give extravagant gifts during the holiday season because they want to make someone they love happy this time of the year, and it feels pretty good to have been the source of that joy. People also often need to travel this time of the year, and some people are dealing with extra expenses from hosting guests.

That adds up, especially when your means are limited, and thus lending institutions simply take their personal loan program and advertise it as a “holiday loan.”

There is a bit of a catch, however.

Holiday loans often have extra fees and high interest rates.

Although “holiday loans” at their core are just ordinary personal loans, banks realize that people often seek them out at high rates in December just to cover things like gifts and travel, so it often means extra fees and higher interest rates to “holiday loans” than to normal personal loans. You might be able to get a personal loan in July with minimal fees and a good interest rate, but in December you’ll be directed toward a “holiday loan” which comes with a fee or with a bit higher interest rate.

It’s supply and demand at work, and the holiday season increases the demand for personal loans. If lots of people are stopping by to urgently request a holiday loan to keep their holiday bills under control, then the banks can nudge up fees and interest rates a little because of the urgency and frequency of the requests.

Consider cutting back your holiday plans rather than going into debt for them.

In short, I feel that taking out a “holiday loan” in order to merely cover the expenses of a holiday celebration is a poor financial choice. Rather than putting yourself in that kind of financial hole, the first thing you should do is to look at cutting back on the expense of whatever you’re doing for the holidays.

For starters, remember that the thing that most people want for the holidays is time spent with people they love, not the perfect item under the tree. Yes, most of us like to open something during the holidays, but it doesn’t have to be the latest, most expensive item out there. Rather, aim for smaller and more meaningful gifts that don’t kill your wallet and send you into a spiral of debt and stress. You’re far better off giving a modest gift and actually being present in the moment than giving a big gift and being stressed out and distracted.

Another thing to remember is that you don’t have to travel for the holidays if it is a net negative for you. Simply skip the big trip this year and instead stay at home and celebrate locally. Alternatively, you might be able to find someone you can stay with at your destination rather than paying for lodging, or perhaps you can drive or borrow a car or take a bus or train to get there rather than flying.

You are far better off dialing down your holiday celebrations a little than grabbing a holiday loan.

Alternately, look for extra work during the holiday season.

Another approach for making a holiday loan more manageable is to simply earn a little extra income during the holiday season. Many retailers are looking for seasonal work this time of the year, plus there are always options like shoveling snow or doing odd jobs to raise a few extra bucks.

Yes, this might require a lot of schedule juggling to pull off, but it’s far better to pay for holiday expenses with money you earned and didn’t have to borrow. That way, there’s no loan payments looking you in the face come January and February.

Start putting aside a few dollars each week to avoid holiday loans next year.

Once the holidays are past, you might want to consider putting a few dollars aside each week for the holidays next year. Most of the same issues that nudged you toward considering a holiday loan this year are going to remain true next year.

If you simply put $5 a week aside in your sock drawer, you’ll have $250 next December. Make it a $10 bill and you’ll have $500 next December. Make it a $20 bill each week and you’ll have $1,000 next December.

Having that kind of cash set aside for the holiday season not only takes a lot of stress out of the season, but it can help you avoid going into debt while also allowing you to take care of the travel and the gifts and the other expenses you feel obligated to cover during the holidays.

If you still feel like you must get a holiday loan, shop around.

Even given these options and considerations, you may still feel like a holiday loan is the best option for you right now. If you feel that way, I strongly encourage you to shop around. Don’t just take out a holiday loan at the first lending institution you come across.

Instead, spend some time evaluating the holiday loan offers at various lending institutions in your town and choose the one with the lowest fees and interest rates. If the loan is small — small enough that you can pay it off in a few months — prioritize low fees. If you’re taking out a larger loan that may take you most of a year or more to pay off, prioritize interest rates (unless the fees are 10% or more of the value of the loan).

Try to borrow as little as you possibly can. You’re far better off trimming down your holiday spending a little or finding ways to come up with the money on your own than going into debt for holiday expenses, as noted earlier.

Also, when you do start repaying the debt, pay it off as fast as you can, even making extra payments if necessary. If you also have credit card debt, compare the interest rates and make extra payments on whichever has a higher interest rate.

You don’t need a loan to enjoy the holidays.

Keep that in mind if you’re considering a holiday loan. The season is really about people and family, not about fancy presents and rich meals. It’s about being in the moment with people you care about, and you don’t have to spend money to do that.

Only use a holiday loan if cutting back on your plans isn’t enough or you’re so tight that it’s the only option to avoid a holiday crisis.

Good luck!